What Is a Medical Savings Account (MSA)?
The term “medical savings account” encompasses various tax-benefitted arrangements established since the early 1990s. Among them is a specific type of medical savings account (MSA) authorized and regulated under the Internal Revenue Code during that period. Over time, this account evolved into what is now known as a health savings account (HSA).
In some cases, Medicare Advantage plans provide Medicare MSAs, which are overseen by the Centers for Medicare and Medicaid Services, the administrators of Medicare.
Understanding Medical Savings Accounts (MSAs)
Medical savings accounts (MSAs) were initially introduced by several states in the early 1990s and later became a federal pilot program under the Health Insurance Portability and Accountability Act (HIPAA) in 1996. MSAs enjoyed tax benefits under the Internal Revenue Code and served as models for subsequent medical savings arrangements.
The original type of MSA, which catered to self-employed individuals or members of small group plans enrolled in high-deductible health plans (HDHPs), was phased out in 2003. However, MSAs structured as Archer MSAs were allowed to continue, although the creation of new Archer MSAs was no longer permitted.
In 2003, the Medicare Prescription Drug, Improvement, and Modernization Act introduced a new tax-benefitted arrangement called a health savings account (HSA). Rules similar to those for MSAs, such as eligibility, HDHP deductibles, contributions, and tax treatment, apply to HSAs. HSAs offer benefits to a broader range of individuals compared to the original MSAs, as they are available to employed, self-employed, and unemployed individuals. Both employees and employers can contribute to an HSA.
Apart from HSAs, some employees may have access to other employer-sponsored programs that provide tax-favored healthcare savings. Health reimbursement arrangements (HRAs) are solely funded by the employer, while flexible spending arrangements (FSAs) allow contributions from either the employee or the employer, or both.
History of Medical Savings Accounts (MSAs)
Medical savings accounts were implemented to address the issue of high healthcare costs and make healthcare services more affordable for Americans. The initial MSAs allowed funding from either the individual or the employer, but not both. These accounts were limited to self-employed individuals or employer groups with 50 or fewer employees, and they had specific requirements related to eligibility, contributions, and fund usage. Participants were required to be enrolled in a high-deductible health insurance plan (HDHP). Contributions made by individuals or employers were not subject to taxation, and distributions from MSAs were tax-free when used for qualified medical expenses.
Later on, HSAs were introduced as successors to MSAs, and they continue to be available today. HSAs adopted a similar structure and rules to MSAs, including the requirement that each account must be paired with an HDHP.
Types of Medical Savings Accounts (MSAs)
Medicare Medical Savings Accounts (MSAs)
Medicare MSAs are available as part of high-deductible Medicare Advantage (MA) plans (Medicare Part C). These plans deposit funds into the insured individual’s MSA, which can be used to pay for medical care even before reaching the deductible. Similar to an HSA, Medicare MSAs allow users to have the flexibility to choose their healthcare providers and services. However, it’s important to note that while Medicare MSA funds can be used for services not covered by Medicare, only the cost of Medicare services will count towards meeting the deductible.
Some Medicare MSAs offer additional benefits not covered by the MA Plan, such as dental care, vision care, hearing aids, and long-term care, for an extra cost. However, it’s essential to be aware that Medicare MSAs do not include coverage for prescription drugs. To have prescription drug coverage under Medicare, enrollment in Medicare Part D is required.
Archer Medical Savings Accounts (MSAs)
Prior to 2008, self-employed individuals and small businesses with fewer than 50 employees had the option to create MSAs known as Archer MSAs if they had HDHP coverage. These Archer MSAs were established as tax-exempt trusts or custodial accounts with U.S. financial institutions and operated similarly to the original MSAs (which were discontinued in 2003). However, the law authorizing Archer MSAs expired on December 31, 2007, and as a result, no new Archer MSAs were created after that year. Existing accounts were allowed to continue receiving and distributing funds.
Contributions made by individuals into Archer MSAs were tax-deductible. Currently, contributions into legacy Archer MSA accounts remain tax-deductible, regardless of whether the contributor itemizes deductions or not. Employer contributions are not taxable to the employee. However, only cash contributions are permitted, and interest or other earnings, as well as distributions to cover qualified medical expenses, are tax-free. Unused balances at the end of the year can be rolled over to the following year. If insured individuals change jobs, they can take their Archer MSA with them to their next employer and continue making additional deposits as long as they remain eligible.
Special Considerations
In 2003, the Medicare Prescription Drug Improvement and Modernization Act authorized the establishment of health savings accounts (HSAs) as a permanent feature of the tax code. These accounts were designed to assist individuals enrolled in high-deductible health plans (HDHPs) in covering their medical expenses.
Contributions made to HSAs offer the advantage of reducing federal taxable income. HSAs are accessible to any eligible individual with an HDHP, regardless of their employment status, whether they are self-employed, unemployed, or employed by a small or large company. When an employer contributes to an HSA, or an employee contributes through payroll deductions, these amounts are excluded from the employee’s taxable income. Similarly, direct contributions by self-employed and unemployed individuals are tax-deductible, regardless of whether the individual claims the standard deduction or itemizes their deductions. Funding can be made anytime between the beginning of the calendar year and the tax filing deadline for that year. Furthermore, distributions from HSAs used to pay for qualified medical expenses are tax-free.
| IRS: 2022 & 2023 Contribution and Out-of-Pocket Limits for Health Savings Accounts and High-Deductible Health Plans | ||
|---|---|---|
| 2022 | 2023 | |
| HSA contribution limit (employer + employee) | Self-only: $3,650 Family: $7,300 | Self-only: $3,850 Family: $7,750 |
| HSA catch-up contributions (age 55 or older) | $1,000 | $1,000 |
| HDHP minimum deductibles | Self-only: $1,400 Family: $2,800 | Self-only: $1,500 Family: $3,000 |
| HDHP maximum out-of-pocket amounts (deductibles, co-payments, and other amounts but not premiums | Self-only: $7,050 Family: $14,100 | Self-only: $7,500 Family: $15,000 |
Internal Revenue Service, 26 CFR 601.602: Tax forms and instructions
An HSA is a fully vested account, meaning that funds are not subject to forfeiture if they remain unspent at the end of the year. Each year, the IRS announces the HSA contribution limits, which are adjusted for inflation, along with the required HDHP amounts for the minimum health plan deductible and the maximum out-of-pocket expenses for both self-only and family coverage. Individuals aged 55 and older are eligible for an additional contribution amount annually.
It’s important to note that individuals enrolled in Medicare are not allowed to contribute to HSAs. However, if they have any remaining balance in an HSA, they can make tax-free distributions to cover qualified medical expenses.
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